From Rates

What low-income households pay for essential service in the United States

Over the past 18 months I’ve been working to develop a valid, generalizable depiction of water and sewer affordability in the United States. There’s currently no nationally-representative dataset on water and sewer rates, so my Texas A&M research assistant Jake Metzler and I painstakingly gathered water and sewer rates data from an original, nationally-representative sample of American water utilities.* We then calculated basic single-family residential water and sewer service prices and developed affordability estimates for each utility using the double-barreled methods I published earlier this year.

All that effort is now ready to bear fruit. An initial working paper reports the full methodology and findings in gory academic detail. If there’s interest here, I’ll share more about our findings here over the next few weeks and months – without the academic gore.

Today I’ll start by sketching the basic picture: how we measured affordability, and how affordable water and sewer services are in the US.

The sample & data

We drew our sample from the EPA’s Safe Drinking Water Information System (SDWIS), which SDWIS contains basic system information for the country’s nearly 50,000 water systems. An overwhelming majority of systems serve fewer than 3,300 people, and so a simple random selection would result in a sample of mostly small systems that collectively serve a tiny minority of the total population. So we stratified the sample—that is, we intentionally “oversampled” different kinds of utilities in order to get a wide variety of systems. Our analysis then adjusted mathematically for the sampling procedure to make sure we get truly representative results.

Single-family residential rates data were collected in the summer of 2017. To call the process laborious is an understatement (I’ll probably blog about that some other time!). For most large and medium-sized utilities, rates data were readily available on websites. When rates were unavailable online—especially common among smaller utilities—we inquired by telephone, repeating calls as necessary. Efforts to collect rates data were abandoned after multiple refusals or non-responses. The final dataset included full water and sewer rates data for 329 utilities. That might not seem like much, but it’s a larger sample than most, it’s representative, and we’re highly confident in the validity of the data.

Basic water & sewer as share of disposable income

We measured affordability in two ways; the first is with the Affordability Ratio (AR).

AR estimates basic water and sewer costs as a share of disposable income, which for present purposes is total income minus essential living costs (taxes, housing, food, health care, and home energy), estimated using Consumer Expenditure Survey data. To focus on low-income households, we measure AR at the 20th-income percentile (AR20). The 20th percentile household typically identifies the lower boundary of the middle class. These working poor households have very limited financial resources, but may not qualify for much public assistance.

Here’s what we found:

AR20 averaged 9.7. In substantive terms, that means that in the average utility, a household at the 20th income percentile must spend about 9.7 percent of its disposable income on basic water and sewer service. But AR20 varies widely, from a low of 0.6 to a high of 35.5. As the figure above indicates, AR20 is less than ten for about two-thirds of systems. A handful are very high—but these values reflect very low 20th percentile incomes as much as they do water/sewer costs.

Basic water & sewer in hours at minimum wage

My other way of measuring affordability is to express basic water/sewer costs in terms of Hours’ Labor at Minimum Wage (HM). This approach may not express affordability quite as accurately, but it’s precise and wonderfully intuitive: it represents the cost of water/sewer service in terms of labor. For those of us who have worked at minimum wage at some point in our lives, it is a powerful way to understand the cost of something.

Here’s affordability in the United States measured as HM:

As you’d expect, the distribution is very similar to AR20, ranging from 1.1 to 25.6. The overall average is 9.5, meaning that in the average utility, paying for basic water and sewer service requires about 9.5 hours of labor at minimum wage.

So is water affordable in America?

When confronting affordability, utility leaders are really asking: how much is it reasonable to expect households of limited means to pay?What economic sacrifices are reasonable?

These are ultimately questions about community values. There is no scientific answer to philosophical questions. No metric can define what is “affordable,” but good measurement can help us think about our values.

In the past I’ve suggested AR20 less than 10% and HM less than 8.0 as rules-of-thumb or point of departure to guide discussion. By these guidelines, 51 percent of the sampled utilities are affordable as measured by AR20 and just 39 percent are affordable according to HM.

Looking ahead

We’re now in the process of analyzing the policy, organizational, economic, and demographic correlates of affordability. I’ll be publishing and blogging about what we find over the next several months. For now, I hope these figures provide some food for thought and help frame an agenda for tackling a tough issue.

*Collecting rates data is surprisingly difficult labor-intensive. Jake and I wrote a fun article on that topic–look for it next month.

During the conference several speakers took to the stage to talk about efforts underway in California to ensure affordability as communities grapple with water infrastructure and supply costs. We heard from utility managers, state agency bureaucrats, and state legislators. These were not dilettantes or casual observers; these were experienced people well-versed in water policy, and I heard lots of exciting things about steps and directions the state and its utilities are taking.

Indeed, I’m a bit embarrassed to admit that I was the first to mention the %MHI standard when I launched into my familiar attack on that miserable metric. I’ve been excoriating that metric in rooms full of water folks since 2006.

I’ve had it up to here with %MHI

I can do it in my sleep. But the attack wasn’t necessary in that room on that day. The audience was receptive to more careful measurement and analysis—even if the results weren’t pretty or comfortable.

Good policy requires good measurement. In the case of water affordability, good measurement begins with abandoning bad measurement. The California water community has apparently taken that first step; maybe it’s a sign that the rest of the nation is ready to follow. The quiet disappearance of a number from conversation might seem like the smallest of small victories, but policy revolutions begin with such changes in analytical frameworks.

It is a privilege to speak today on an issue that’s near and dear to me. Like many of the people in this room, I’ve been thinking about and working on affordability for long time. Later today I’ll be presenting some of my own research, but this morning I’m really speaking on behalf of the conference Planning Committee, so when I say “we,” I really mean the committee, AWWA and WEF, and the utilities community generally. My goal in this talk is to clarify language and lay out an agenda for what promises to be two jam-packed days to geek out on affordability.

But more fundamentally, we want to articulate a vision of what water affordability really means, and how we might turn that vision into reality. The very fact that you’re here in our nation’s muggy capital for two days of discussions on water and sewer affordability indicates that you don’t have to be told that this is an important issue—your presence here demonstrates that you “get it.”

So in a sense I’m preaching to the choir this morning. But as any churchgoer knows, sometimes the choir needs preaching, too; a sense of direction and means of articulating a common purpose on the path ahead. With that in mind, in the next few minutes I want to address three basic questions to unify and guide us for the next two days and the important work beyond.

Why now?

We’re at an extraordinary moment for water affordability, if only because, for the first time in a generation, water and sewer infrastructure are on the national political agenda. A confluence of forces has pushed this issue to the forefront. The country is facing huge replacement costs for aging infrastructure. At the same time, there’s been a steep decline in federal grant support for water and sewer infrastructure—the programs that built these systems in the 1970s and 80s. Over the same period, we’ve seen steady increases in costs of housing & health care—essential costs of living. We’ve also seen a generation of wage stagnation, especially for middle- and working-class workers. So even as the broader American economy prospers, for many households there’s a real squeeze on the resources needed to pay the necessities of life.

But there’s something else going on too.

It’s not fair, but whether we like it or not, the Flint Water Crisis is now the public face of the water sector in America. The Flint Water Crisis put the politics of water infrastructure and regulation on front pages across the country, along with poverty and race. Flint isn’t the first, or largest, or most severe drinking water crisis in America in recent years, but it’s the one that caught the public imagination and put a spotlight on utility infrastructure. What happened in Flint is not just water and sewer, it’s also about poverty and race, working class wage stagnation, and ultimately it’s about human health. Flint’s water crisis began in many ways as a financial problem, and even today Flint customers pay some of the highest water rates in the country. That’s put affordability at the forefront of the national conversation on water.

Over the past two years, hardly a week has gone by without a major American news outlet running a story on drinking water and sewer issues. In 2016 Bernie Sanders mentioned water and sewer plants in a presidential debate (the water twitterverse fairly exploded in astonishment!). Water, sewer, and flood control figured prominently in the White House Infrastructure plan published earlier this year—which was surprising if only because politicians usually only give that kind of love to transportation and energy infrastructure. Just this summer California Senator Kamala Harris introduced federal legislation aimed at addressing water affordability. None of these people is a renowned water geek! You don’t need to be a political scientist to recognize that something’s unusual is happening when ambitious, high-profile politicians are drawn to water & sewer infrastructure.

I’ve been a part of the water utility community for more than twenty years; many of you have been at this for much, much longer. We haven’t seen this kind of widespread attention to drinking water and sewer in many decades. Now is the time.

Why us?

A big part of what’s driving concern for affordability is working class wage stagnation and rising housing and health care costs in the United States. Those are macroeconomic issues. What does any of that have to do with water and sewer utilities? Utilities don’t do macroeconomic policy. We’re in the water business, not in the poverty alleviation business. We often hear that water is underpriced, and anyway water is cheap compared to things like housing and health care—that’s what’s really squeezing working class families. So why is this our problem?

There are at least three reasons. The first is simply that communities are demanding solutions. Water and sewer utilities are public services, and the public demands service. If the public perceives an affordability problem and demands solutions, “it’s not our problem” is not going to be a satisfactory answer. Ultimately, the legitimacy of the water sector depends on the public trust. Dismissing the issue of affordability as outside our portfolio damages that legitimacy. A public that does not trust the water sector to provide for the most vulnerable will be understandably skeptical of our requests for resources and authority.

A reasonable expectation

The second answer to “why us?” is because we can. We can’t do anything about income stratification or wage stagnation. We can’t do much about housing or health care costs. We’re in charge of water and sewer systems. But water and sanitation are among the basic necessities of life, and for some households they represent significant cost burdens. Utilities can’t solve macroeconomic problems. We can’t cure poverty. But we can help, and where we can help, we must.

And that brings us to the last “why us?” reason, which ties into the last big point:

Why it matters

Affordability is central to utilities’ core missions: human health, environmental quality, and economic development. Drinking water and sanitary sewer systems are the most amazing everyday miracles of the modern age. In fact, access to drinking water and sanitation are the very definition of development. It’s what marks a society as modern and developed. Water and sanitation systems save more lives than all of the hospitals in the world. Safe drinking water and clean environmental water facilitate economic growth everywhere. They facilitate economic growth and prosperity. Once upon a time, governments built water works with tax revenue and provided water without charge. Today they’re paid for with service fees, which makes a lot of sense for a lot of reasons. But when those rates become unaffordable, it strikes at the very heart of utilities human health mission.

Research finds that if people can’t afford high-quality tap water or perceive tap water to be unsafe, they substitute sugary beverages and bottled water or kiosk water—ironically far more costly—which exacerbates the affordability problem. We’ve also begun to see a troubling trend of communities across the country are experiencing increasing public defecation and straight-piping, with attendant effects on public health. It is a startling return to 19th-century water problems. At a deep and fundamental level, the affordability strikes at the foundations of the water community as a whole.

Water people are my favorite people. The men and women of the water sector are smart and amazingly dedicated—it’s a community of true believers. They’re in this business because they want healthier, more prosperous communities. Nobody gets into this business to squeeze every last dollar out of the customer. Nobody gets into this business because they want to shut people off from their water supply. But in the words of Abel Wolman, “Just as there is no escape from a hydrologic cycle, there is no escape from the dollar.” Wolman is one of the most important environmental engineers in history—in many ways the father of modern wastewater technology, and a huge influence on the development of the Clean Water Act. Wolman understood that affordability is at the very core of utilities’ mission, every bit as much as treatment or resource management.

The challenge

Affordability is a big, complex, multi-faceted problem that will require complex, multi-faceted solutions. That’s daunting, but certainly not insurmountable—and in some ways, it’s encouraging.

Consider violent crime. Back in the late 1980s and early 1990s America faced a crisis in violent crime, prompting raft of responses in the public and private sectors, at every level.

Crime was bad when I was in high school & college. Wasn’t me, I promise.

Here’s a graph of violent crime in the United States since 1960. As you can see, it peaked in the early 1990s. Since then, violent crime has fallen steadily, and is now half of what it was at its peak. Researchers have spent a tremendous amount of time, crunched a lot of numbers, and spilled a lot of ink trying to figure out what exactly caused that drop in crime.

Turns out that lots of things contributed; new law enforcement strategies and criminal sentencing guidelines, certainly. But also early childhood intervention, community outreach initiatives, gang intervention programs, drug interdiction—all of the above. No single one of those factors accounts for that generational drop in crime—it was the interaction and combination of all of those efforts. The solution to violent crime took dedication, resources, and lots of hard work by lots of people at every level of society, from policymakers in DC to law enforcement professionals to community organizers.

If we can make that kind of progress with violent crime, I have to believe we can deal with water affordability. It’s a big, complex problem. This is a big, complex, diverse country with lots of overlapping and interlocking institutions. Meeting this challenge is going to require contributions by lots of people from lots of angles.

It’s crucial to keep the goal in mind: essential water and sewer affordability for low income households. That’s the goal. That’s the purpose. That’s the subject of this conference.

It’s NOT about utilities or governments—this isn’t about whether utilities have the financial capacity to pay for capital and operations. It’s NOT median or average customers—in all but the smallest, most desperately poor communities, the median customer doesn’t really have an affordability problem. It’s about the working-class individuals and families who may receive little or no public assistance, but nonetheless still struggle to make ends meet. It’s also NOT about all water service—We’re not here to address the affordability of filling a private swimming pool or irrigating a half-acre lawn. It’s about essential use for drinking, cooking, and sanitation.

How do we get there?

The causal chain

It’s a complex path, which brings us to what the planning committee called “the causal chain.” Lots of things affect affordability, and so lots of individuals and institutions are involved in addressing affordability.

Any link on this chain can help or hurt affordability

The most immediate and obvious are utilities, which directly serve and bill the customer. Rate design is the most important and obvious factor affecting affordability. Forbearance, and direct customer assistance programs funded or operated by the utilities themselves also affect low-income households. But rates and other utility programs are a function of a utility’s capital and operating costs. Factors that affect costs can flow through to low-income households. Critically, cost reduction or efficiency improvements at the utility level do not necessarily improve affordability at the customer level, at least not for all customer in the same way. Customers experience those costs through their rates; increased costs can hurt affordability, but not necessarily. Reduced costs or increased efficiency can help affordability, but they do not necessarily. A dollar-per-customer of reduced operating cost doesn’t necessarily mean a dollar-per-customer reduced bill. We should bear in mind that there are a couple of links on the causal chain between utility costs and customer affordability.

Then there are state & federal policies that can affect utility costs. Regulations, infrastructure funding, research, training, and technical assistance by state and federal agencies can increase or reduce costs for utilities. But those increased or decreased costs don’t necessarily flow through dollar-for-dollar to low-income households. Let’s say a state regulator changes a rule in a way that increases treatment costs. Utilities absorb those costs, but can do so more or less efficiently. They can then recover those costs in a variety of ways through their rate structures, in ways that might or might not affect low-income affordability. In the same way, a federal grant or loan program can reduce a utility’s operating costs, but that grant doesn’t necessarily help low-income affordability. The point is that there are a lot of links on the causal chain that connects federal water policy to low-income customers. It depends on how the utility manages the grant, and how that grant funding is used to offset various kinds of rate revenue.

On the other hand, state and federal governments might have programs aimed directly at customers, such as fixture rebates or assistance programs meant to subsidize utility costs. A great example from the energy sector is LIHEAP, which provides direct assistance to low-income customers to pay for home energy. That kind of policy connects state and federal governments directly to low-income customers.

There are also nonprofit and social service organizations that affect customer-level affordability through direct assistance. Federal government and utilities can also reach customers indirectly in cooperation with social service and nonprofit organizations.

All of these pieces operate simultaneously. In the end, what matters is how they converge to affect affordability for low-income households. It’s important to keep the eye on that ball—that orange box at the right-hand side of the slide is what matters. That’s a big, messy picture—but each piece can contribute to or alleviate the problem of affordability. Each piece can help or hurt utilities’ public health missions, too. We hope this figure will be a touchstone as we move through today and tomorrow, reminding us how all the pieces fit together, where each of us fits in the big picture, and most of all, keep us focused on that orange box at the right.

Finally—and this is crucial—we have to keep in mind that that those low-income households are people. They’re individuals and families. They’re citizens, not subjects. At each step of the way, it’s important to understand the lived experiences of people who live paycheck-to-paycheck, and how decisions on each link of that causal chain shape those lived experiences.

The path ahead

It’s a complicated problem, and it’s going to require creativity and leadership to solve. This symposium is an exciting step toward meeting the challenge. End of lecture!